Capital projects execution - The bugbear for India’s chemicals industry: Kearney

Capital projects execution - The bugbear for India’s chemicals industry: Kearney

The next few years could well usher in a golden era for India’s chemicals industry. But the industry’s growth trajectory hinges on making major capex investments in a timely and cost-efficient manner.

  • By ICN Bureau | July 28, 2023

In 2019 Prime Minister Narendra Modi announced his vision of making India a $5 trillion economy and a global powerhouse. But to get there, the country will have to grow at 7 to 8 percent for the next three to four years, creating an investment imperative. The chemicals industry is off to a promising start as it spends heavily to expand capacity.

Challenges to managing Capex projects

The Indian chemical industry is the sixth largest in the world and is expected to grow 8 to 10 percent annually through 2030, with revenue and profitability growth fueled primarily by new capex. Organizations executing these projects will need to navigate five challenges:

1. Limited organizational readiness to undertake projects at scale

For many companies, both scale and number of projects have gone up. Two major challenges are plaguing the chemicals companies as they undertake these projects. First, many have failed to develop capital project execution capabilities. This has led to a lack of experienced resources.

Attrition rates are high, and key disciplines such as process, mechanical, and structural engineering are missing or significantly underdeveloped, forcing dependence on external contractors. Other important functions, such as project controls and risk management, are often completely missing.

There has been significant under-investment in systems, processes, and standards. Consequently, there is no single way to execute projects within an organization, and outcomes are more people-driven than systems- and process-driven. Most companies have not invested in digital tools for effective project management and controls, limiting their ability to effectively monitor projects and provide timely interventions.

2. Supply chain bottlenecks in a Capex-intensive environment

While India has a good ecosystem of tier 1 design and construction firms for large capital projects, capabilities are less robust for the medium-sized projects typical of the chemicals industry. With significant increase in the number of projects, mid-size engineering firms are facing a resource crunch, especially for experienced talent. Securing equipment is another challenge, and delivery lead times have gone up significantly. Finally, the pandemic triggered a huge exodus of migrant labor as people moved back to villages putting pressure on labor supply.

3. Rapidly changing market cycles in an interconnected world

The past few years have brought some major supply chain shocks to the chemicals industry. The US–China trade war and ensuing pandemic resulted in the China Plus One strategy. To cope with pandemic lockdowns, governments increased spending, leading to inflation. The Russia–Ukraine conflict rapidly pushed up prices. Central banks around the world are tightening their monetary policies to combat inflation. Undertaking capex projects in this volatile environment is complex, and companies need strong risk management practices to execute successfully.

4. Increasing technological complexity

While India has improved its chemical plants, it still faces challenges. Many complex and unproven technologies are shifting to India where local conditions can be unpredictable. Less emphasis is being placed on pilots, quality assurance, and testing, making careful planning and execution imperative.

5. Rising sustainability and ESG imperatives

Due to increased investor focus on sustainability, projects need to have clear ESG goals. The biggest opportunity for integrating ESG imperatives is in the project planning and design phase, which should encourage design innovations and energy efficiency.

How leading organizations get it right

Eight capex imperatives need to be in place in order for the chemicals industry to overcome their capex challenges:

Start with the right project organization. Identifying the right organizational structure—in line with the scale and the number of projects—is a prerequisite. Focus on developing an independent and empowered PMO that can serve as a center of excellence and drive standardization and best practices while ensuring robust monitoring and control. Onboard strong project leaders and craft roles, career paths, and training plans for the junior to mid-management layer.

Invest in design and engineering capabilities. Strong in-house design teams can have a big impact on both the project schedule and the cost. Right-size the team based on the scale, nature, and number of projects in a year. A good design team can help lower costs and speed up execution through improved design outputs, reduced engineering design duration, and standardized specs.

Adopt digitalization. Digital tools can help companies identify leading and lagging KPIs, integrate L4 and L5 plans with daily activity reports, and provide real-time visibility into project progress, cost, and cashflows.

Design to cost, and enhance value. Focus on project value, value engineering, standardization, modularization, and alternative execution approaches. Standardization of specs can yield significant benefits by compressing the schedule and managing costs. There are multiple approaches to value engineering, including material spec optimization, design optimization, and modularization.

Develop process playbooks, from planning to commissioning. Process playbooks should be tailored depending on the size and nature of projects. Companies need to transition from people-centric execution to a system- and process-driven approach. Develop a common methodology based on best practices and organizational requirements.

Integrate project control. Embed project controls that encompass the schedule, cost, quality, and health, safety, and environment (HSE). A multilevel governance architecture ensures that the right topics are discussed at each level, with clear mandates. The PMO should conduct regular reviews to track progress and monitor for roadblocks.

Ensure end-to-end risk management. Implement a comprehensive risk management strategy with well-defined governance protocols. Establish a multi-level risk register covering everything from board risks to operational risks. The register should outline both probabilities and mitigation strategies for each risk.

Adopt optimal contracting strategy. Develop a contracting and bundling strategy based on internal and market capabilities. The unbundling and contracting choice depends on the technical and execution risk-carrying ability of the company. Leading chemicals players with a strong project track record usually take the owner managed execution approach as it leads to significant cost savings, especially for small to mid-size projects.

The next few years could well usher in a golden era for India’s chemicals industry. But the industry’s growth trajectory hinges on making major capex investments in a timely and cost-efficient manner.

Authors: (Vivek Dua, Partner; Viswanathan Rajendran, Partner; Sudeep Maheshwari, Partner; Anurag Sharma, Principal and Avinash Nayak, Principal. All Speakers are from Kearney.)

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